Legal Updates

Bush-Era Tax Cuts May Expire as Step to Budget Deal, Tyson Says

By Rich Miller
September 19, 2012 4:17 PM EDT

Bush-era tax cuts may be allowed to expire at the end of the year as a prelude to an agreement on the budget, according to Laura Tyson, an economics professor who advises President Barack Obama on the labor market.

An expiration “is the major scenario right now,” Tyson, a professor at the University of California-Berkeley and a member of Obama’s jobs advisory board, said in an interview today with Bloomberg News editors and reporters in Washington.

Tyson played down the impact of such a step on the economy, saying the tax cuts could be reinstated later and made retroactive to the start of 2013. The expiration though might help “force” through a deal on the budget, she said.

The Berkeley economist took Republican presidential candidate Mitt Romney to task for criticizing Federal Reserve Chairman Ben S. Bernanke and said the financial-services industry is undergoing a “secular” change that would restrict its profits during the next decade.

The income-tax reductions that were first pushed through in 2001 and 2003 by former President George W. Bush are the biggest single item in the so-called fiscal cliff -- a mix of more than $600 billion of tax increases and government spending cuts that will go into effect next year if Congress does nothing.

House Speaker John Boehner said on Sept. 11 that he was “not confident at all” that Congress will reach a deal on avoiding the fiscal cliff and blamed Obama and the Democratic- controlled Senate for the impasse.

Tyson, who served as chairman of the Council of Economic Advisers under President Bill Clinton, said the “tone may change” on Capitol Hill if Republicans lose seats in the Nov. 6 election.

“The willingness to deal might change,” Tyson said, adding, “I’m optimistic” there will be an agreement. She said she’s unsure whether that will occur later this year or early in 2013.

There’s little appetite in Washington for providing much in the way of stimulus for the economy, Tyson said. Some small measures though might be discussed in the context of negotiations on the fiscal cliff, including extending and possibly broadening the 2 percent payroll-tax cut due to expire at year-end, according to Tyson.

The economics professor said the Fed “did the right thing” last week in deciding to expand its holdings of long- term securities in a third round of quantitative easing.

The move showed that central-bank policy makers “are seriously worried about the economy,” she said. Growth slowed to a 1.7 percent annual rate in the second quarter from 4.1 percent in the final three months of last year, and the jobless rate has been stuck above 8 percent since February 2009.

Romney criticized the Fed’s action, saying it would do more harm than good, and repeated his determination to replace Bernanke as Fed Chairman when his term expires in January 2014.

“I would criticize the Romney campaign for attacking the Fed and the Fed chair,” Tyson said, adding that politicians in general should refrain from bashing the independent central bank.

Tyson, who is on the board of Morgan Stanley (MS), said the financial-services industry is undergoing a structural change in the aftermath of the recent crisis. Companies are trying to come up with new business models at a time of “very significant” uncertainty about the regulatory regime they face, she said.

It’s unclear how some of the new rules governing the industry, both domestically and internationally, will be implemented, she added.

Morgan Stanley and Goldman Sachs Group Inc. also are adjusting to being regulated by the Fed after converting into bank holding companies during the crisis, she said. Morgan Stanley is the sixth-largest U.S. bank by assets and Goldman the fifth largest. Both are located in New York.

“People have put their heads down to try to figure out what to do with their own institutions,” she said.

She said she does not see a return to the days before 2007, when the industry’s profits were growing as a share of the economy and as a share of corporate earnings.

“It’s not just cyclical,” she said. “There’s a change in the structure of the industry going on.”

To contact the reporter on this story: Rich Miller in Washington at rmiller28@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

Fiduciaries (trustees, executors, personal representatives) normally are not personally liable for the obligations of the trusts and estates they administer. As mentioned here previously, a major exception to this is the federal priority statute (a/k/a the federal claims statute) under 31 USC §3713(b)/Code § 6901(a)(1)(B). This little gem can create personal liability for a fiduciary that pays out estate or trust assets (including by reason of a distribution to beneficiaries) with knowledge that there are existing federal liabilities (such as taxes) that are unpaid, if the estate or trust is unable to later satisfy those liabilities.

This is not an abstract risk, but a very real liability for fiduciaries, as two fiduciaries learned in a recent case in Texas. In that case, the IRS asserted that a decedent did not pay gift taxes during lifetime, attributable to gifts indirectly made to the decedent. That is, the original donor did not pay the gift taxes on gifts to the decedent, so the decedent was liable for the gift taxes as a transferee. Both the executor of the decedent’s estate, and the trustee of his revocable trust, were knowledgeable of the IRS’ claim but nonetheless paid out funds without making provision for the payment of the gift taxes.

The case is illustrative of various aspects of the statute.

A. The executor was liable for personal property that was distributed to beneficiaries. This is a common problem since by the time the family gets to the lawyers, they have often already made these distributions. This can be a problem under the claim statute, and also state statutes regarding priority of expenses and distributions.

B. The executor was liable for rent payments made by the estate. Such payments are subordinate in priority to the federal claim for taxes.

C. The executor was NOT liable for funeral and last illness expenses. While the federal statute does not on its face allow an exception for these items and other administrative expenses, case law exceptions to these payments exist to the extent they have a priority for payment under state law.

D. The trustee of a revocable trust got caught up in the statute because the trustee was deemed to be the equivalent of a representative of the estate due to the obligation of the trust to pay the decedents debts.

E. The fiduciaries had taken income tax charitable deductions for over $1.1 million that had been set aside to fund charitable bequests. Such bequests were subordinate to the federal claim, so the fiduciaries were held personally liable for those set-aside amounts because the court found that the funds were beyond the reach of the IRS. Presumably, since those set-aside amounts were still held in the trust, the fiduciaries will have direct access to those funds to pay the liability, but perhaps the charities can somehow block that in the same fashion that the IRS and the court found that the IRS did not have access to those funds. In the case, the amount of the other expenditures that created liability for the fiduciaries was minuscule compared to this potential $1.1 million exposure.

F. The fiduciaries were liable for legal and other expenses they paid for the charities. The court noted that payment of legal fees of the estate and trust for administrative purposes are generally not subject to the claim statute, but since these were obligations of third parties then they were not exempt under the statute.

G. The fiduciaries do not have to receive formal notice or a claim from the IRS, to be on notice for purpose of the statute. The court provided:

the knowledge requirement is not actual knowledge. Leigh, 72 T.C. at 1110. It is sufficient to show that the fiduciary had “notice of such facts as would put a reasonably prudent person on inquiry as to the existence of the unpaid claim.” Id. Neither Marshall nor Hilliard contend that they were never told that the IRS might try to make a claim against Stevens for the unpaid gift taxes on the Gift. In fact, they admit that they were both told that the IRS might try to assert a claim against Stevens's Estate for donee liability on the Gift.

H. The fact that the fiduciaries did not believe the IRS’ claim was valid, or that they relied on their professionals, did not relieve them of liability. The court noted:

[T]hey argue that they did not believe the IRS's claim against Stevens was valid for various reasons. But, as the government points out, Marshall and Hilliard's belief in the validity of the government's claim is not the test. Marshall and Hilliard had sufficient notice of the claim to put a reasonably prudent person on notice. It is regrettable that they received incorrect advice on that point, but poor legal advice is not a defense. Despite their belief that the government's claim was not valid, Marshall and Hilliard were required by § 3713 to preserve the funds to pay the government's claim—should it be proved valid.

U.S. v. MACINTYRE, 109 AFTR 2d 2012-XXXX, (DC TX), 06/25/2012

Helping you focus on what matters most.

Tax-Free Transfers to Charity Renewed For IRA Owners 70½ or Older; Rollovers This Month Can Still Count For 2012

IR-2013-6, Jan. 16, 2013

The Afterlife of Your Frequent Flier Miles
http://travel.nytimes.com/2012/11/25/travel/the-afterlife-of-your-frequent-flier-miles.html?_r=2&

Can We "Talk" to Vegetative Patients Via fMRI? See http://www.popularmechanics.com/science/health/nueroscience/can-we-talk-to-vegetative-patients-via-fmri-14733177?click=pm_latest

Saturday, July 07, 2012

FIDUCIARIES TAGGED UNDER FEDERAL PRIORITY STATUTE

Possible Changes to Gift and Estate Tax Laws
http://trustsandestates.com/wealth_watch/super-committee-proposals-estate-gift-tax-1110/